Personal Finance

How investment clubs can help you learn -- and profit
By Gail Bebee | 22/05/12

A BMO InvestorLine study recently reported that more than one-third of Canadians currently trade online or are considering doing so. Many of these investors do not possess sufficient know-how to successfully call the investing shots themselves. Joining an investment club is an enjoyable way for these individuals (and anyone else who is interested) to raise their investing IQ.

About the Author
Gail Bebee is an independent personal finance speaker, teacher and the author of No Hype--The Straight Goods on Investing Your Money. She can be reached at gbebee@gailbebee.com; her website is www.gailbebee.com.

The term investment club encompasses an assortment of organizations. An investment club could be as simple as a regular gathering of like-minded friends to talk investing. To optimize the value to members, such an informal group should adopt at least a basic organizational structure: a club name and goals, defined meeting frequency and location, list of members, and a chair to set the agenda and run the meetings.

Personal finance magazine Canadian MoneySaver champions volunteer-run investment clubs for individuals who want to learn by sharing financial information. The magazine and website publish a list of these clubs in Ontario, Alberta and B.C. that are open to new members.

Some investment clubs collect regular contributions from members and buy and sell investments as one pooled fund. In this way, members can diversify their holdings and reduce their risk with a relatively small monetary outlay. The main club objective is usually educational, with profits a secondary aim.

Trading investments as a group adds significant complexity to an investment club and requires dedicated members. Individuals contemplating going this route have considerable work to do before the first club trade is executed.

"My best piece of advice for prospective investment clubs is to begin by making a legal agreement," says Nizar Amarsi, who is organizing an investment club in Toronto. "With a formal structure, you avoid future problems such as disagreements on buy and sell decisions for stocks, or how to handle the departure of a member," says Amarsi, an equity-data analyst with the CPMS division of Morningstar.

Setting up an investment club begins with an organizing meeting of interested individuals to discuss the club's goals, investment philosophy, organizational structure and name. Assuming there is an interest in proceeding, the group should assign individuals to investigate and report back on specific topics.

There will be many things to consider. A clear structure with defined positions (chair, vice-chair, treasurer, committees, etc.) and responsibilities is essential for smooth club operation.

Operating procedures are needed for such things as membership requirements, level of member contributions, how investment decisions are made, who is authorized to make trades, and recordkeeping. Sound records are particularly critical to successful club operation. Ideally, a member adept at computing and familiar with accounting should be responsible for this area.

An investment club is subject to securities laws and regulations in the province where its members are located, but certain exemptions from the prospectus and registration requirements are available.

Under section 2.20 of National Instrument 45-106 Prospectus and Registration Exemptions, the obligation to file a prospectus does not apply to a club if it is an investment fund, has no more than 50 members, does not borrow money from or distribute securities to the public, does not pay for investment advice or administration except for normal brokerage fees, and requires members to contribute to club operating costs only in proportion to the value of each member's holdings.

Section 8.10 of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations provides an exemption to the club from the dealer-registration obligation, if the club meets the same conditions required for the registration exemption.

Canada Revenue Agency requires that tax be paid on investment-club profits. CRA Information Circular No.: IC73-13 Investment Clubs is mandatory reading for new clubs. Such clubs would also benefit from contacting the local CRA office to review the rules for reporting club income and preparing tax slips for each club member.

Some investment clubs operate informally. However, a legal structure such as a modified trust or partnership agreement or incorporation is preferable to prevent problems down the road. Consulting a securities lawyer is advisable in order for the club to best meet its goals and comply with applicable laws and regulations.

Once the club is formally established, it should assign certain members to open the club bank account. This is also the time to set up the club's discount-brokerage account. For the latter, the process is likely to include completing a special investment-club form which all club members must sign.

The many American books on investment clubs do not reflect Canadian securities laws and tax rules. I located only two comprehensive Canadian references: How to Start and Run an Investment Club for Fun and Learning from the Canadian Securities Institute (now CSI) and The Canadian Investment Club Kit, published by of the now defunct Investors Association of Canada. These books, while still useful, date from the late 1990s. CSI has no plans to update its book.

Online resources for investment clubs are also largely American, but can be helpful to Canadian investment clubs. The National Association of Investors Corp.iclub.com and bivio.com offer information, education and tools such as specialized accounting software to help small investors set up and manage investment clubs.

Joining an investment club is a sociable way to learn the investing ropes and potentially earn some profits. If you want to improve your investing knowledge, why not check out the investment club options available in your neighbourhood?

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